Small Cap Value Report (14 Oct) - SRT, TSTL, YOU, MCB

Monday, Oct 14 2013 by

Good morning! It's going to be a quiet week for me this week, as I'll be home every day in Hove, so we'll be back to early starts here every day. As opposed to constant trips to London for company meetings in the previous 3 weeks, which was informative, but takes up a lot of time.

I'm currently engrossed in the trading statement webcast from Software Radio Technology (LON:SRT), a £36m market cap technology company providing marine tracking beacons. What an excellent innovation from such a small company, to communicate so well with investors and analysts by the CEO giving a briefing by video on the internet, accessible to all. You can even ask questions live. Excellent stuff! I'm very much supportive of this kind of initiative, which levels the playing field so that increasingly private investors are also getting the same quality of information as Institutions, which is how it should be.

After all, it's private investors who set the share price, and create the liquidity in the shares, and narrow the bid/offer spread. So companies & their advisers that ignore us, are not really thinking.

SRT has an excellent story to tell, and it all sounds very interesting, but it's too speculative for me. I generally like companies that are already producing good, sustainable profits, and are reasonably priced. Rather than, as in this case, companies that promise to make profits in future, but where the share price requires you to pay up-front. You need to do a lot of research for this type of growth company, to be sure that the likelihood of them hitting profits targets is high enough to justify being asked to pay up-front for it with a toppy rating. Even then, things can go wrong, so it's not for me.

Where there is a large speculative element to a company's valuation, then personally I feel happier with a sub-£20m market cap. Happier still nearer to £10m market cap.


I should also add that SRT today announces a small acquisition of a company called GeoVS, which has developed 3D marine imaging software. The £955k purchase price has been satisfied by the issue of 3,083k new shares in SRT. Although it doesn't add any earnings at this stage, just costs, expected to be £400k in H2. So I would imagine that will make it harder for SRT to meet full year expectations. In the webcast their CEO says the £400k loss in H1 on just £3.2m turnover is as expected, so they have a lot to do in H2 to hit broker consensus of £14.1m turnover and £3.1m pre-tax profit for the year to 31 Mar 2014.

I'm not going to pre-judge it, but I will point out that companies which need to achieve big increases in sales & profits in H2 to meet forecasts, often fail to do so.





Once again no doubt this week will be dominated by the shenanigans in the USA Government, over the debt ceiling & partial Govt shutdown. What a ridiculous state of affairs, that politicians could inflict such potentially disastrous (in)action on the country, and indeed the world. So we can probably expect another week of volatility.





Tristel (LON:TSTL) has announced good results for the year ended 30 Jun 2013. Although it should be noted that they had already informed the market of improved H2 trading in their trading update on 22 Jul 2013. Although I note that H2 delivered £1.1m in adjusted pre-tax profits, as against £0.9m forecast back in July.

As always, it is becoming essential to check what the adjusted items are, as companies generally are abusing EPS and adjusted profit to such an extent these days, that you really can't take the headline figures as being reliable any more.

I read in the papers over the weekend that one company (I think it was Rentokil?) had reported exceptional items in something like 32 consecutive results statements! I can think of many small caps that also report exceptional items with every set of results. So at some point you have to wake up to the fact that some of these companies are not actually making much, if any profit at all, they just massage the figures to make it look as if they are!


In the case of Tristel, I note that they have adjusted for £2.2m of non-recurring items in the results announced today. That's highly material, as it takes them from a £1.75m loss on the face of the P&L to a £0.5m adjusted profit in the headline bullet points.

I've done some more digging, and it looks reasonably OK in this case - the £2.2m "non-recurring items" are non-cash, and are mainly impairment provisions against investments, goodwill, and fixed assets, which you can see in note (i) to the cashflow statement, and total £1.2m. Another £120k is disclosed in note 4, as being related to writing down the value of stock, and also mentions redundancy costs. Well, redundancy costs are a cash cost, so can't really be disclosed as non-cash.

Overall though, it looks reasonably sensible, in writing down legacy assets on the Balance Sheet, so I can't get worked up other this. Although it does somewhat undermine the "non recurring" nature of such provisions when note 4 also cheerfully mentions that further provisions have been made in the current year! So non recurring costs that have immediately recurred! Hmmmm.


 In the current year further provisions have been made against slow moving inventory totaling £199,000.


Overall, I can't really get excited about Tristel from these figures. It looks OK though, and I note they have a solid Balance Sheet, and pay a dividend. It's just difficult to see any spark of excitement about the future, and on the historic figures the valuation doesn't look a particular bargain to me. The outlook statement is "cautiously optimistic", which doesn't get any excitement going either.

Maybe I'm being too harsh, but it would certainly be an interesting company to get along to a meet the management evening, so we could get a bit more flavour about what the company does, and the opportunities it has for the future. Remember that my reports here are just fairly cold, and brief reviews of the numbers, so I haven't looked into the story in any great detail for most companies, that's up to you dear readers!





YouGov (LON:YOU) was last mentioned here on 14 Aug, when I flagged that it was looking potentially interesting.

It has issued results for the year ended 31 Jul 2013 today. They look fairly good. Turnover is up 8% to £62.6m, and adjusted operating profit is up 7% to £6.0m. I see that they have rounded up the 9.6% operating margin to 10%. I bet if it had been 9.4% they would have used a decimal point, instead of rounding it down to 9%!

Adjusted EPS is reported at 5.6p, so as usual I'll go through the rather painful process of working out what costs they are trying to ignore. The figures are pretty material in this case. Basic EPS is only 2.1p, yet they massage this up to 5.6p in the adjusted numbers, which clearly makes a massive difference to how you value the company.

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Also I note there is a negative tax charge for the year, which seems odd. Looking at note 3 to the accounts, that is mainly due to a £1.13m adjustment in respect of prior years, which goes in YouGov's favour, turning a £490k tax charge into a credit.

The main adjustment in arriving at adjusted profit & EPS, appears to be the £3.3m amortisation of intangibles. That would be fine if it was just goodwill amortisation, which I am happy to ignore. There are also exceptional costs of £1.2m (versus £0.5m last year) which are adjusted out.

I've just found a reconciliation from reported profits to adjusted profits in note 5:

Looking first at the amortisation charge, as that's the really big adjustment, actually NONE of it is related to goodwill, as they don't seem to amortise their goodwill at all. It's shown at £38.8m on the Balance Sheet, and subject only to an annual impairment review.

So the £3,280k amortisation charge is actually concerning no fewer than six categories of costs which they capitalise - being: consumer panel, software & development, customer contracts & lists, Patents & trademarks, Order backlog, and Development costs.

They capitalised £1,879k of "internally developed" costs in the year, and also capitalised another £1,759k of "separately acquired" costs.

So the inescapable conclusion I have to reach here is that these are very aggressive accounting treatments, and hence in my opinion the adjusted profit & EPS figures are greatly exaggerating the true underlying performance of the business, and should be disregarded.

So on that basis, with 2p per share being the more accurate figure for the company's performance, I think the share price at 72p looks far too high. Clearly the market is happy to rely on the adjusted profit figures. Well I'm not, so this one is coming off my watch list.

The cashflow statement often provides a quicker route to spot this issue of companies capitalising costs that probably should be expensed. In this case the £6.9m cash generated from operations is then almost halved by £3.6m in "purchase of intangible assets" - which is just another word for internal costs. So the true cash generation is only about £3.3m in reality.

I'm not saying they are breaking any rules in presenting the numbers in this way, just that it's a very aggressive form of accounting, which in my view leads investors up the garden path, in thinking that the business is much more profitable than it really is. 

The stingy 0.6p dividend (a yield of under 1%) is consistent with 2.0p diluted EPS, at just over 3 times dividend cover. The Balance Sheet looks pretty solid, with current assets at 156% of current liabilities, which is a comfortable position. There is only £3.4m in long term creditors, mainly deferred tax, so that's fine too.

There is one other litmus test I use to confirm whether a company is presenting its performance figures in an overly aggressive way, and that's Director selling of shares. Sure enough, there's been about £1.7m banked through Directors selling in the last 18 months, and no Director buys. I rest my case.






McBride (LON:MCB) has issued an IMS timed to coincide with its AGM. It doesn't sound great, with group revenue down 3%, although they say that overall, full year expectations remain unchanged.

I wrote a review of the company here on 5 Jul, and re-reading it, all sounds relevant still.

So the bottom line is that there's a good dividend yield here, but it seems to be a mature, and capital-intensive business. There is some debt, and a pension deficit too, but neither look to be a serious problem.

I'll stick my neck out here, and say that my guess is that, sooner or later, this company could warn on profits again, which might provide a better entry point? They're just in a very competitive space, and it's difficult to see where profits growth will come from.





That's it for today. It's becoming increasingly clear that the "adjusted" profits figures presented by many companies are becoming far too misleading to just accept without question. From now on, I shall be drilling down into every company's profit adjustments, to ensure they are fair and reasonable.

The biggest issues seem to be ignoring costs that are capitalised, as well as ignoring their amortisation. You can't ignore both! You either account for performance on a cash basis, or on a P&L basis after amortisation. There is only one type of amortisation that can validly be ignored, and that is amortisation specifically attributable to goodwill on acquisitions.

Companies that lump in a load of other costs onto the Balance Sheet, and then try to adjust out the amortisation charge will be named & shamed here, because it's presenting a deliberately misleading view of the results. If you capitalise a cost on the Balance Sheet, then you have to accept that there will be an amortisation charge through the P&L. Ignoring that amortisation charge, at the same time as capitalising more of the same costs, is not acceptable, because it inflates profits artificially.

I think a new accounting standard is needed on this, as the situation is getting out of hand now, and inevitably is leading some investors into overpaying for performance that is not real, through their reliance on inflated adjusted EPS figures.

Some adjustments are fine, for genuine one-offs, or historic factors that genuinely won't recur. However, I think companies have pushed too far on the adjustment issue, and it's time that investors started pushing back.


See you tomorrow, from 8 a.m..

Regards, Paul.

(of the companies mentioned today, Paul holds no long or short positions)

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Software Radio Technology Plc (SRT) is a United Kingdom-based company. The Company develops advanced radio communication based marine domain awareness technologies, products and systems.

Share Price (AIM)
-0.4  -1.1%
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Mkt Cap (£m)

Tristel plc is a United Kingdom-based company. The Company is engaged in manufacturing of infection control, contamination control and hygiene products. The Company operates in three segments: Human healthcare, Contamination and Animal healthcare. Hospital healthcare segment concerns the manufacture, development and sale of infection control and hygiene products which includes products that incorporate the Company’s chlorine dioxide chemistry under the brand Tristel, and are used primarily for infection control in hospitals. Animal Healthcare segment relates to manufacture and sale of disinfection and cleaning products, into veterinary and animal welfare sectors. Animal health segment includes products under the brands Anistel, Dermastel, Enzystel, Medistel, Airstel and Odostel. Contamination control segment addresses the pharmaceutical and personal care product manufacturing industries, in which the products are branded Crystel. more »

Share Price (AIM)
1.0  1.4%
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YouGov plc is the United Kingdom-based international market research company. The Company has 6 operating divisions based on geography -UK, Middle East, Germany, Nordic, USA and France. Its 3 product lines are Custom Research, Data Products and Data Services. The Company’s products includes BrandIndex, Profiles, Pulse, Omnibus, Reports and CustomResearch. BrandIndex is a daily brand perception tracker. YouGov’s flagship brand intelligence service, tells its clients what the world thinks of their brands and their competitors at any given moment. Profiles- Planning and segmentation tool. Pulse- Is a real-time digital behavior tracker. Omnibus surveys are run daily, providing nationally representative responses to clients within a 48 hour turnaround (only 24 hours in the UK).Reports (previously called SixthSense reports)-Comprehensive market intelligence report. CustomResearch-Quantitative and qualitative research. YouGov ME FZ LLC, YouGov M.E. Egypt LLC, are few of its subsidiaries. more »

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17 Comments on this Article show/hide all

Techno Trousers 14th Oct '13 1 of 17

What happened to you adding the current price that companies are trading at within your reports? You started a while back and seems to have been dropped again? It's very useful when trawling back over previous reports and in determining the price movement. Not essential, but would be good if you could add in?
Love your reports, I read them every day and miss them if ever there is a day without!
Thx, TT

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Paul Scott 14th Oct '13 2 of 17

In reply to Techno Trousers, post #1

Hi TT,

It was too much of a ball-ache to insert the share prices manually, because the £ XYZ format creates the company name & ticker automatically, so it meant that I then had to go back into each article & amend them all manually. There's so much else to remember each morning, I just found it one step too much & kept forgetting, despite a note on my screen, etc.

I nearly always mention the share price in the text anyway, and it only takes a second to glance at the chart to see what the share price was on that day anyway.

I've asked Stockopedia if there's any way then could automate it, so fingers crossed there.

Cheers, Paul.

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mteller 14th Oct '13 3 of 17

Hi Paul

Just for info, I believe Tristel are doing a results presentation tomorrow for investors. At London Captial club, 16.15pm, organised by Walbrook PR (contact

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zoolook 14th Oct '13 4 of 17

Ball-ache? is that a technical term :-)

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Chrisfarrell21 14th Oct '13 5 of 17

Cracking bit of learning there for a Monday morning, cheers Paul.

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Crusty 14th Oct '13 6 of 17

I gave up on McBride a while ago. Their niche of manufacturing and supplying private label (own brand) cleaning and washing materials, undercutting the giants, seemed very appealing and should be very profitable. However, it seems to me that the huge advertising budgets and the margins offered to supermarkets have all but driven cheap brands from the shelves. After all, if you can make 50% on a large range of superficially competing products then why stock a cheapo? Eastern Europe where McB is doing well does not yet suffer this type of consumer exploitation. It will.

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purpleski 14th Oct '13 7 of 17

As Chrisfarell says very informative and very educational and as Techno Trousers said I always read your reports and really find them, interesting and educational.

The other thing about all this nonsense with adjusted figures is what does it say about the management. On the one hand they play around with the figures (which if one does the research can be seen through) and yet they expect the private investor to entrust their money to them.

Thanks Paul for the insight.

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Bezhe 14th Oct '13 8 of 17

Those with a few grey hairs (or none at all) will remember the forerunners of exceptional items - extraordinary items and acquisition provisions. They became discredited because of abuses - recurring annually etc - and were eventually knocked. Exceptional items were supposed to be included before arriving at EPS but obviously, this "adjusted" result mess is taking things in the same direction. Keep up the pressure to make it unacceptable. (Incidentally, do the auditors have no say in these things?)

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Katewarren 14th Oct '13 9 of 17

Sounds as if, in some cases, the adjusted eps has become a form of legal trickery designed to "pull the wool" over the eyes of potential investors. Thanks Paul for your detailed analysis. I agree that a new Accounting Standard is required. In the meantime we can vote with our wallets and refuse to invest in such companies. Perhaps when you do "name and shame " we private investors might like to send the " investors section" of their company website an email saying why we will not be investing in their company ! ..........just a thought !

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Paul Scott 14th Oct '13 10 of 17

In reply to Bezhe, post #8

Hi Bezhe,

Your historical perspective ties in with my recollection too. When I began my accountancy training in the early 90's, I recall that Extraordinary Items (which had been widely abused), and over-provisioning for restructuring, were being outlawed by new accounting standards. FRS3 I think it was.

But since then, exceptional items crept in, and then companies seemed to just make up their own definitions, with them recently settling on non-recurring, or adjusted items, presented in the narrative to the results. Brokers have been persuaded to run with these adjusted figures too, so the overall result now is that in some sectors where it's abused greatly (especially software companies), the market is really over-valuing a lot of companies because the EPS figure being used is a greatly inflated figure that adjusts out a lot of costs which must be accounted for.

YouGov was a pretty shocking example this morning, Globo has accounts that greatly exaggerate real profit (if there is any?) in my opinion, and also has the red flag of very stretched debtors.

So there is clearly a cycle here - companies abuse accounting standards increasingly, until a new accounting standard is required to tighten things up again. Then companies spend the next few years conforming, until some clever dick comes up with a way to get round the new rules, then others gradually follow suit.

So I wonder what the accounting standards people have got planned in this regard? Something obviously needs to be done.

In the meantime, I wonder if Terry Smith is free to write another book about all these accounting tricks? Maybe I should write a book on it?! There are enough topics to fill a book - adjusted earnings, excessive Director remuneration, overseas companies Listing on AIM because it's unregulated, Chinese companies & their fantasy accounts, the weak Nominee system that disenfranchises many shareholders, Placings which hand discounted shares to Institutions and by-pass private investors, and those are just the ones I can think of off the top of my head.

Regards, Paul.

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Geoffclark 14th Oct '13 11 of 17

Good afternoon Paul,
What have you done to upset spaceandpeople?

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Paul Scott 14th Oct '13 12 of 17

In reply to Geoffclark, post #11


LOL nothing! I've also been scratching my head as to why the share price at Spaceandpeople (LON:SAL) has come off so sharply, since there has been no news from the company. Must just be the ebb & flow of buyers & sellers?

Still someone dumping shares in a nice company at a low valuation just creates a buying opportunity for those of us who've done our research & have some spare cash on the sidelines ;-)

There are always bargains to be had in small caps, even when the market overall is frothy.

Cheers, Paul.

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Leven 14th Oct '13 13 of 17

Hi Paul - there is plenty of material for a book there! I would also love to have a read of your unpublished chapter for Free Capital if you'd be willing to share it? Thanks!

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Paul Scott 14th Oct '13 14 of 17

In reply to Leven, post #13

Hi Leven,

I might have a serious think about the possibility of writing a book on what's wrong with the markets & accounting practices at the moment. After all, it was the making of Terry Smith when he wrote "Accounting for Growth" back in 1992. Getting bad practice publicised widely is the first step to improving things.

As regards the chapter on me in Free Capital, which didn't make it into the final book, I've probably already said too much about it, so it might be worth querying it with Guy Thomas, after all he wrote the book. My chapter wasn't about crowing about how well I'd done in the good years, but I used it as an opportunity to warn people of the dangers of what could go wrong through hubris, the dangers of excessive gearing through Spread Bets, and other dangers such as lack of liquidity in troubled markets, and how to survive a market meltdown such as 2007-8.

Such a pity that it didn't make it into the book, but the publishers only wanted success stories, not roller-coaster stories. That's all very well, but I actually think showing people how to avoid the dangers is more important than giving examples of success. If you protect the downside, then the upside tends to look after itself.

Cheers, Paul.

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BrianGeee 15th Oct '13 15 of 17

The biggest problem with Adjusted EPS figures is that Bloomberg and Reuters use them in preference to the real figures, no matter how reasonable or unreasonable the adjustments.
BTW, I thought 'Exceptional' had now been replaced by 'Significant', but it makes no difference if management have created the new category of 'Adjusted'.

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Monty9 16th Oct '13 16 of 17

On the same subject, the mention of EBITDA sends me immediately to the Depreciation and Amortisation lines in he P&L.  Of course EBITDA is relevant when buying a business for £1 from an administrator / liquidator - someone else has already paid for the capital.

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Paul Scott 20th Oct '13 17 of 17

In reply to BrianGeee, post #15


Absolutely, I agree. To my dismay I've found that broker forecasts seem to all accept without question the management definition of adjusted EPS, and hence calculate forecasts on the same basis. This means that forecasts often have to be taken with a pinch of salt, or at least drilled down into to find comfort into their reasonableness.

There is a risk that whole sectors of the market could become significantly overpriced, if this trend continues, since people will be paying a PER of say 15 times grossly inflated EPS, meaning that in reality they could be paying a PER of 50 or more, without even realising it! That's the sort of stuff that sows the seeds for a crash.

Regards, Paul.

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About Paul Scott

Paul Scott


Paul trained as an accountant, then spent 8 years as FD for a ladieswear retail chain.He became a professional small caps investor in 2002 to date.Paul writes a small caps report for on weekday mornings. He joined Fundamental Asset Management Ltd as a research associate in 2014, as part of their Small Cap Value Portfolio team. more »

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